China Investment Law Fails to Deliver, Raises Concerns

China’s top legislature is expected to pass the country’s first Foreign Investment Law this week at a time when negotiators from Beijing and Washington work to hammer out a trade deal.

Analysts and business groups say the legislation is a step in the right direction, but still falls short. In some ways, they add, it even raises new concerns that negotiators need to address before the two sides reach a deal.

For decades, China has been grappling with the question of just how far and how fast it should open up its state directed economy, and steps — while always welcome — have long lagged behind expectations. The Foreign Investment Law is not different.

In a statement, the American Chamber of Commerce in China (AmCham China) said it welcomes the law and appreciates the effort to improve the investment environment.

“We are concerned, however, that such an important and potentially far-reaching piece of legislation will be enacted without extensive consultation and input from industry stakeholders, including Foreign Invested Enterprises,” the statement said.

An earlier version of the law was put together in 2015, but later stalled during the review process, only to resurface more recently. When it did, the wording was more general and more vague, analysts note. By contrast, the first version had 171 articles, the new one has 41.

This some argue, helped pave the way for the bills speedy passage. NPC Observer, a website that closely follows China’s legislature or National People’s Congress, notes that by keeping the legislation vague, the government will have more room and time to craft implementing regulations after the law is enacted.

“The law is phrased and drafted with very general provisions. There are a number of things that are not covered in there, such as what percentage of foreign investment qualifies as foreign invested,” said Lester Ross, who heads AmCham China’s policy committee. “Another major concern is the requirement for security assessments even for non-mergers and acquisitions, even for greenfield investments, which seems unnecessary.”

Subsidies still an issue

The newer version of the law was fast-tracked as Washington and Beijing work to hammer out a trade deal. While the provisions in the legislation address some persistent concerns, such as forced technology transfers, equal access to government procurement and national treatment, it does not address other issues, such as subsidies for state owned enterprises.

Clearly though, the legislation was pushed through the system in part to address what is being discussed at the negotiation table, said Mats Harborn, president of the European Chamber of Commerce in China.

“It is more than a law, it is a document that states principles and it is a document that states principles that we [foreign investors] would like to hear. And it also states the principles that U.S. negotiators want to have on paper from China,” Harborn said. “But the proof in the pudding will be the implementation.”

National security concerns

And while the law echoes concerns that are part of what trade negotiators are discussing, issues such as the broad application of national security reviews and the mention of national security in the law are cause for concern, argues Austin Lowe, a Washington D.C.-based consultant and analyst.

In a recent article on the legal and national security website Lawfare, Lowe highlighted provisions in the legislation that foreign companies should not “harm national security or the public interest” and that businesses that affect national security should be subject to a review.

“Together, these provisions essentially give the state — and, in turn, the Chinese Communist Party — free rein to intervene in a wide range of investment activity, signaling to foreign investors that they are better off avoiding any investment in an area that may be construed as politically sensitive or threatening,” he wrote.

Ross notes that while security reviews have been in place since 2011, they have, so far, been used very selectively and largely for mergers and acquisitions.

“Now it looks like this is an additional hurdle that will apply across the board,” he said.

While it doesn’t mean that every investment could face such scrutiny, there are no bounds to how it can be applied, and in some cases that would require revealing a company’s intellectual property, Ross added.

“When you put national security into any document it creates a great deal of arbitrary judgement on what is national security and what is not,” notes the EU Chamber of Commerce’s Mats Harborn. “It is a very wide definition that creates uncertainty.”

Not only does it create uncertainty, but the questions the new law raises will add to the issues negotiators will need to resolve going forward, Ross said.

“While on the one hand it is a good thing that they are showing some significant degree of intention to reduce barriers to foreign investment and actually making some substantive changes, once the law is in place it may actually be more difficult to make departures from that in the course of the negotiations,” he said. …